New broker model: An alternative to the alternative

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Take one traditional real estate brokerage model, turn it upside down, nix the usual discounted commissions or rebates that come with a so-called “alternative” brokerage, and you have Sawbuck Realty.

While some real estate brokerages may be cutting staff and consolidating offices to survive the housing downturn that’s chilling sales in many markets, Sawbuck opens its doors in the Washington, D.C., area today, with high hopes of changing the old ways of operating brokerages.

Sawbuck’s business model centers on serving consumers at the beginning of a transaction by offering an online map-based search system for local listings, referring them to an agent in the company’s referral network, then taking a referral fee from closed transactions.

Plenty of realty brokers operate affiliated mortgage and title or settlement businesses, which is where they say the best profit margins are, but Sawbuck instead chose one national partner for mortgages and one for settlement services and offers to buy down the mortgage interest rate and negotiate rock-bottom pricing on closings for buyers using its services, essentially making them “free” to consumers.

Sawbuck co-founder Guy Wolcott admits that a free mortgage at first sounds like a gimmick. But he says the company’s portion of the buy-side commission is enough to be able to pay its national mortgage partner to give Sawbuck’s buyers the best available interest rate without any of the usual fees that go along with that.

Wolcott is betting that the mortgage and settlement cost savings will be enough added value for consumers to want to do business with agents in its referral network. He says that up front, buyers may save $5,000-$8,000 in lender fees and closing costs, but over the life of the mortgage the savings can add up to six figures.

“We’ve negotiated a formula that ensures our buyers get a rate that’s below market,” Wolcott said. The lender takes a fee from Sawbuck in exchange for offering the low rate and no fees to the consumer.

The company skirts RESPA scrutiny because it’s not taking a referral fee from the lender or settlement provider. RESPA, which stands for the Real Estate Settlement Procedures Act, governs real estate closings and referral fees exchanged among affiliated businesses.

Also, buyers can shop around for a better mortgage and aren’t forced into using the mortgage and settlement offered via Sawbuck, Wolcott said.

What the company pays to its lender and settlement services partners, it hopes to make up for in referral fees from top agents that will be connected to buyers.

By offering the no-fee mortgage and settlement package, as well as comprehensive property information at the beginning of a search, Sawbuck’s co-founder says the company is doing a lot of work to qualify the buyer and send the referral.

“We’re actually contributing something to the deal,” Wolcott said. “We’re not just flipping (agents) a lead; we’re giving them a real buyer.”

The company offers live chat on its site so that consumers can ask questions without being connected to an agent and then choose to be connected when they are ready.

The agents that Sawbuck refers buyers to are hand-picked, and the company prefers to partner with experienced, top-producing agents who often are a part of a team, he said.

Sawbuck has about 12 teams of agents in Maryland, Virginia and the Washington, D.C., area where it operates.

Wolcott and his business partner, Steve Barnes, previously owned a mortgage company, where they first noticed inefficiencies in the brokerage business.

“The problem is not with agents,” Wolcott said. “There’s just way too many of them and many are not good, experienced agents.”

On the company’s blog, he says that one in 79 adults in the U.S. is an agent.

“Commissions (in terms of dollars) have gone way up, but very few people are making money,” Wolcott said, and he concludes that’s because brokers and agents are paying more money to outside companies for customer leads.

While Sawbuck’s business model sounds like a win for consumers, its ability to turn a profit remains to be seen. Operating a profitable brokerage can be tough even during a good housing market, let alone braving the waters of a tough market where even large brokers are fighting for their grip on market share.

Sawbuck’s founders think their model will work in the Washington, D.C., area and they plan to expand to other areas soon.